P1.D.3 Overhead Costs

Question 1

Variable Overhead Costs

P1.D.3 Overhead Costs

Answer 1

1. Portion of overhead costs that increase (decrease) as the number of units increase (decrease).
2. Considered short term.

Question 2

Budgeted Variable Overhead Rate Formula

P1.D.3 Overhead Costs

Answer 2

= Budgeted Variable Overhead / Budgeted Production or Budgeted Labor Hours

Question 3

Fixed Overhead Costs

P1.D.3 Overhead Costs

Answer 3

1. Overhead costs that don’t change with the level of output.
2. Considered long term.

Question 4

Fixed Overhead Rate Formula

P1.D.3 Overhead Costs

Answer 4

= Budgeted Fixed Overhead / Budgeted Production or Budgeted Labor Hours

Question 5

What are the different methods of determining overhead rates?

(P1.D.3 Overhead Costs)

Answer 5

1. Plant-wide rates
2. Departmental rates
3. Activity-based or Individual cost driver rates

Question 6

Plant-Wide Rates

P1.D.3 Overhead Costs

Answer 6

Uses total overhead costs to determine overhead rates.

Benefits

1. Easier and faster
2. Appropriate for companies with low overhead costs or have similar activities or cost drivers.

Limitations
1. Not applicable for companies with significant overhead costs

Question 7

Plant-Wide Rate Formula

P1.D.3 Overhead Costs

Answer 7

= Total budgeted overhead / Single plant-wide cost driver

Question 8

Departmental Rates

P1.D.3 Overhead Costs

Answer 8

Uses total overhead costs incurred by a department.

Benefits
1. More accurate than plant-wide rates.

Limitations
1. Don’t take into account the varying activities that relate to overhead costs.

Question 9

Departmental Rate Formula

P1.D.3 Overhead Costs

Answer 9

= Budgeted departmental overhead / Departmental cost driver

Question 10

Activity-based or Individual Overhead Rates

P1.D.3 Overhead Costs

Answer 10

Allocates overhead costs using different cost drivers.

Benefits
1. More accurate overhead cost allocation.

Limitations
1. May be costly and difficult to implement.

Question 11

Components of Variable Overhead Expense

P1.D.3 Overhead Costs

Answer 11

1. Indirect material: may be traceable but are considered variable overhead due to immaterial amount.
2. Indirect labor: salaries for supervisor, material handling staff, inspection personnel.
3. Other variable manufacturing overhead: rent and electricity.

Question 12

Components of Fixed Overhead Expense

P1.D.3 Overhead Costs

Answer 12

1. Fixed factory rent expense
2. Fixed production related salaries
3. Production related insurance expense
4. Depreciation and amortization
5. Fixed utilities expense
6. Other fixed overhead expenses

Question 13

How to apply over/underapplied fixed overhead

P1.D.3 Overhead Costs

Answer 13

Overapplied
Debit fixed overhead
Credit WIP, finished goods and COGS

Underapplied
Debit WIP, finished goods and COGS
Credit fixed overhead

If amounts are insignificant, debit/credit fixed overhead and credit/debit COGS

Question 14

What cost allocation methods are used for service and support departments?

(P1.D.3 Overhead Costs)

Answer 14

1. Direct
2. Step-down
3. Reciprocal

Question 15

Direct Method

P1.D.3 Overhead Costs

Answer 15

1. All service dept. costs are allocated to operations depts.
2. Simplest method but least accurate.

Question 16

Step-Down Method

P1.D.3 Overhead Costs

Answer 16

1. Steps down from one support dept. to the next, then to production.
2. Start with the largest expense first, ignoring the least significant allocation.
3. Once a service depts. costs have been allocated, they can’t be allocated back to the other service dept.

Question 17

Reciprocal Method

P1.D.3 Overhead Costs

Answer 17

1. Used simultaneous formulas to allocate ‘reciprocally’.
2. Most accurate

Example:
M = 360,000 + .05S
S = 95,000 + .1M

M = 360,000 + .05(95,000 + .1 M)

Question 18

What are the two methods to separate fixed and variable components from mixed costs?

(P1.D.3 Overhead Costs)

Answer 18

1. High-low method: simple and easy to compute but least accurate.
2. Regression analysis